Jump to content

The Florida Retirement System


joel
 Share

Recommended Posts

Guest dmj1998

Joel,

The Investment plan appears to be quite generous and very appealing in that employees can now have more control over their retirement income. I noticed on the website that employees have the option to elect now and will have the option for a one-time choice to go back to the pension plan. If that is the case, I would think that it would be very foolish for most employees to not select the investment plan and "roll the dice" with returns, as long they are given the option of going back to the traditional plan, which can now be viewed as kind of a retirement insurance policy.

Link to comment
Share on other sites

dmj,

Have you also noted that current Pension Plan participants have the right to transfer their accrued DB to their individual account maintained by the Investment Plan. I believe this is a first in the annals of public pension planning. Am I right?

Peace,

Joel

Link to comment
Share on other sites

Will they be able to return to the DB plan at the same level of accrued benefits that they left with or will their benefits be determined by the amount transferred from the DC plan to the DB plan-- in other words if they make bad investment choices their benefit level will be less after their return then it would have been had they not left? I cant believe that the employees can game the system but the Fla REtirement system did invest 300m in enron stock.

mjb

Link to comment
Share on other sites

mbozek,

Here is the answer to you thought provoking quesion.

Peace,

Joel

==========================================

Q60. Is there a financial penalty if I switch to the Investment Plan and later decide to switch back to the Pension Plan?

A60. No. But while there's no penalty, you may need to "buy back" into the Pension Plan. (See the chart below.) If you are an eligible employee at the start of the Choice period*, the total amount you'll need to buy back into the plan is the "present value" of your accumulated benefit in the Pension Plan, assuming all your service had been in that plan. The Division of Retirement will calculate this amount once you notify your employer that you'd like to rejoin the Pension Plan. It will also be available through the CHOICE SERVICE, on this Web site, after the close of your Choice period. Remember, you can switch only once after you make your initial choice.

If... Then...

Your total balance in the Investment Plan is greater than the "buy-back" amount... Your Investment Plan balance will be reduced by the "buy-back" amount; the rest will stay in the Investment Plan. You will have assets in both plans.

Your Investment Plan balance is less than the "buy-back" amount and you still want to switch back... You must make up the difference out of your own money.

You choose the Investment Plan going forward but leave your current benefit frozen in the Pension Plan... You can't move your frozen money later to the Investment Plan; it must stay in the Pension Plan.

* Employees hired after the Choice period begins will pay the total cost of the Pension Plan benefit for the time purchased.

Link to comment
Share on other sites

So the prior service benefit is frozen. It is just the future benefit that the employee is giving up with the option to buy back.

Is the Fla Ret. system benefit based on Final Ave Pay? If so it would be in the ee's interest to return before comp used for FAP is earned because cost of buying back benefit will increase dramaticaly. EEs may need to hire an actuary to determine when is the optimal time to buy back.

If this is a FAP plan then it appears that FLA is looking to save future pension liabilitities on baby boomer retirees by assuming they won't come back or that the ee will be such good investors that they will be able to pay for for their own retirement accruals -- e.g. fla will not have to fund such liabilities. Please tell me what is in it for the employees??? ( are they going to hire investment advisors?) Maybe this option should come with a warning that employees should consult with a financial planner before making election.

mjb

Link to comment
Share on other sites

mbozek,

Your employee safeguards are written into the law. Ernst & Young and Financial Engines are the investment advice/education providers.

I encourage you to log onto: www.myfrs.com. In my opinion I feel that the Florida State Board of Administration as the Board of Trustees of the FRS is in the process of putting together what will shortly be known in retirement planning as the gold standard.

I, for one, value your observations and look forward to your learned reaction to the Florida undertaking which is going to be the largest single transfer of capital from one plan to another in the history of pensions in the U.S.

Peace and Hope,

Joel L. Frank

Link to comment
Share on other sites

Guest Article

Government Employees' Pensions: It's All About Empowerment... But For Whom?

--------------------------------------------------------------------------------

by Joel L. Frank

In the 1960s and '70s, the nation's public institutions of higher education began to acknowledge just how hurtful the traditional defined benefit ("DB") type of pension plan was to their mobile employees. They addressed this portability problem by establishing defined contribution ("DC") pension plans as an option to DB plans.

Case Study in New York

In 1964 the New York State Legislature established an Optional Retirement Program ("ORP") for public employees at the public institutions of higher education. In order to be cost neutral, the employer is required to contribute the same amount to the employee's individual investment account maintained by the DC ORP as would have been contributed on the employee's behalf to the DB pension plan of the Teachers' Retirement System. (This also applied to the employee benefit package for health, disability and life insurance coverage.) The employee is not required to contribute. The employer contributes 12% of the first $16,500 of salary, plus 15% of the salary above $16,500.

Let's assume that an employee who began his or her ORP participation in 1964 has been paid at the same level as a New York City public school teacher during each of the past 36 years. The individual's 2000 account balance would be $1.3 million if all of the contributions were invested in the Guaranteed Interest Fund, $1.7 million if all the contributions were invested in a mix of equities and bonds (the asset allocation employed by the Trustees of the eight DB plans of New York), or $2 million if all of the contributions were invested in the equities fund.

It's True That Each Type of Plan Has Its Advantages

The main advantage of a DB plan is that it assures retiring members with equal periods of service at a given employer a consistent ratio of retirement income to final average salary. And this ratio (though not the amount of retirement income) is predictable if it can be assumed that the employee will stay with a given employer until retirement.

A major advantage of a DC plan is that it adds a consistent and visible percentage of salary to each member's total compensation at the time the compensation is earned. If one person's salary is more than another's, the deferred compensation is greater by the same percentage, not warped out of proportion by age or length of service. This pattern of funding, unlike a DB plan that defers most of the employer's contribution to the final years of long service, helps keep the pension plan a neutral factor when the person is deciding about joining or leaving an employer (also when the employer is making the decision). In an era when increasing numbers of the public workforce are no longer remaining with one governmental agency (federal, state or local) for an entire career, it seems reasonable for each employer along the way to contribute a fair share toward a person's retirement income, and for the individual to have the same ultimate income whether staying with one level of government or moving among the three.

The DC plan also has budgeting advantages for the governmental unit. Pension costs are a constant percentage of salary each year. And the employer's pension obligation for each person is fully and permanently funded at the time the obligation is incurred, not left as an open liability tied to whatever salary levels the future brings.

Employees Should Have a Choice

Recognizing that a DC plan can be designed to provide retirement income at least equal to that of a DB plan, one might ask why haven't the public employee unions fought for their member's right to choose either approach. The answer lies in the word empowerment. The unions want to maintain their influence and control over the employee's life from the moment one first enters the public service until termination, retirement or death, whichever comes first! After all, who receives praise when a state legislature approves enhancements to the DB plan or a COLA for retirees? The unions, of course.

The employee's right to choose the type of plan, DB or DC, which the employee believes would be best for him or herself and their respective families represents a threat to union influence and control. For example, an ORP participant who has the $1.3 million balance is excluded from participating in a COLA program and happily welcomes the exclusion. And why not?! The $1.3 million represents the present value of a lifetime fixed-dollar pension of $138,000 starting at age 65. (Think of this balance as the retiree's Pension Reserve Fund established by the DB plan.) How many public employees in this nation are about to retire, after 36 years of service with one employer, on a pension of half that amount or $69,000, let alone $138,000? And remember, investing the same contribution that the employer would have contributed to the DB plan if the employee chose, in 1964, to remain with the DB Teachers' Retirement System, generated $1.3 million.

Every state should do the right thing, as Florida has just done, and establish an ORP for all of its employees. Current as well as future employees will have the right to choose either the Florida Retirement System's DB plan or the new Florida Retirement System's DC plan, known as the Florida Retirement System Public Employees Optional Retirement Program (FRS PEORP). Current members of the traditional DB plan will be allowed to transfer the present value of their accrued DB pension to their individually owned and directed investment account maintained by the PEORP. This is the largest pension conversion of its kind in the nation's history. The sun, indeed, shines in the Sunshine State.

Just think about the number of employees at the nation's public institutions of higher education who opted out of DB plans in the 1960s-'70s. Close your eyes…just look at their contented faces. The word empowered is clearly visible. The nation's public employees, like their colleagues at the public institutions of higher education, should have the statutory right to accumulate wealth, if they so choose, through their employment-based pension plan. Annuitization of pension wealth should be voluntary not compulsory. After all, the state capitols and city halls do not issue stock options.

Joel L. Frank

PO Box 148

Marlboro, New Jersey 07746-0148

(732) 536-9472

Email: rollovertsa@dellnet.com

--------------------------------------------------------------------------------

BenefitsLink is an independent national employee benefits information provider, not formally affiliated with the firms and companies who kindly provide much of the content and advertisements published on this Web site, including the article shown above.

--------------------------------------------------------------------------------

URL of this page: http://www.benefitslink.com/articles/frank000908.shtml · This page last modified: Monday, October 16, 2000 · Webmaster: webmaster@BenefitsLink.com (Dave Baker) · Copyright 2002, BenefitsLink.com, Inc. (contact the webmaster for reprint permission) · Linking: Feel free to link directly to this page, even without specifically crediting BenefitsLink ® as its source. Glad you're here! · Privacy Policy

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...